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1、,Chapter 15,Multiple Deposit Creation and the Money Supply Process,2005 Pearson Education Canada Inc.,2005 Pearson Education Canada Inc.,15-2,Four Players in the Money Supply Process,1.Central bank:the Bank of Canada2.Banks3.Depositors4.Borrowers from banksBank of Canada1.Conducts monetary policy2.C
2、lears checks3.Regulates banks,2005 Pearson Education Canada Inc.,15-3,The Banks Balance Sheet,Bank of Canada,Government securitiesAdvances to banks,Currency in circulationSettlement balances,Assets,Liabilities,Monetary Base,MB=C+R,2005 Pearson Education Canada Inc.,15-4,Control of the Monetary Base,
3、MB=C+ROpen Market Purchase from bankThe Banking SystemThe Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesSecurities$100Securities+$100Reserves+$100Reserves+$100Open Market Purchase from PublicPublic The Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesSecurities$100Securities+$100Reserves+$100Deposi
4、ts+$100Banking SystemAssetsLiabilitiesReservesChequable Deposits+$100+$100Result:R$100,MB$100,2005 Pearson Education Canada Inc.,15-5,If Person Cashes Cheque,Public The Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesSecurities$100Securities+$100 Currency+$100Currency+$100Result:R unchanged,MB$100Ef
5、fect on MB certain,on R uncertainThe effect of an open market purchase on R depends on whether the seller of the bonds keeps the proceeds from the sale in deposits or in currency.The effect of an open market purchase on MB,however,is always the same whether the seller of the bonds keeps the proceeds
6、 from the sale in deposits or in currency.,2005 Pearson Education Canada Inc.,15-6,Open Market Sale of Bonds,MB=C+ROpen Market Sale to a bankThe Banking SystemThe Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesSecurities+$100Securities-$100Reserves-$100Reserves-$100Open Market Sale to the PublicPub
7、lic The Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesSecurities+$100Securities-$100Reserves-$100Deposits-$100Banking SystemAssetsLiabilitiesReservesChequable Deposits-$100-$100Result:R$100,MB$100,2005 Pearson Education Canada Inc.,15-7,Open Market Purchase in the Foreign Exchange(FX)Market,MB=C+R
8、Open Market Purchase of foreign exchange from a bankThe Banking SystemThe Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesFX$100FX+$100Reserves+$100Reserves+$100Open Market Purchase of foreign exchange from the PublicPublic The Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesFX$100FX+$100Reserves+$1
9、00Deposits+$100Banking SystemAssetsLiabilitiesReservesChequable Deposits+$100+$100Result:R$100,MB$100,2005 Pearson Education Canada Inc.,15-8,If Person Cashes Cheque,Public The Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesFX$100FX+$100 Currency+$100Currency+$100Result:R unchanged,MB$100Effect on
10、MB certain,on R uncertainAgain,the effect of an open market purchase on R depends on whether the seller of FX keeps the proceeds from the sale in deposits or in currency.The effect of an open market purchase of FX on MB,however,is always the same whether the seller of the FX keeps the proceeds from
11、the sale in deposits or in currency.,2005 Pearson Education Canada Inc.,15-9,Open Market Sale in the FX Market,MB=C+ROpen Market Sale of FX to a bankThe Banking SystemThe Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesFX+$100FX-$100Reserves-$100Reserves-$100Open Market Sale of FX to the PublicPubli
12、c The Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesFX+$100FX-$100Reserves-$100Deposits-$100Banking SystemAssetsLiabilitiesReservesChequable Deposits-$100-$100Result:R$100,MB$100,2005 Pearson Education Canada Inc.,15-10,Shifts from Deposits into Currency,Even if the Bank of Canada does not conduct
13、 open market operations,a shift from deposits into currency will affect R.However,such a shift will have no effect on MB.Shifts From Deposits into Currency:Public The Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesDeposits$100Currency+$100Currency+$100Reserves$100Banking SystemAssetsLiabilitiesRese
14、rves$100Deposits$100Result:R$100,MB unchanged,2005 Pearson Education Canada Inc.,15-11,Advances,Banking System The Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesReserves AdvancesAdvancesReserves+$100+$100+$100+$100Result:R$100,MB$100Conclusion:Bank of Canada has better ability to control MB than R
15、,2005 Pearson Education Canada Inc.,15-12,Deposit Creation:Single Bank,Consider a$100 open market purchase from First BankFirst BankAssets LiabilitiesSecurities$100Reserves+$100First BankAssets LiabilitiesSecurities$100Deposits+$100Reserves+$100Loans+$100,2005 Pearson Education Canada Inc.,15-13,A b
16、ank cannot safely make loans for an amount greater than the excess reserves it has before it makes the loan.The final T-account of the First Bank(after the reserves have been withdrawn)is:First BankAssets LiabilitiesSecurities$100Loans+$100,2005 Pearson Education Canada Inc.,15-14,Deposit Creation:B
17、anking System(r=10%),Bank AAssets LiabilitiesReserves+$100Deposits+$100Bank AAssets LiabilitiesReserves+$10Deposits+$100Loans+$90Bank BAssets LiabilitiesReserves+$90Deposits+$90Bank BAssets LiabilitiesReserves+$9Deposits+$90Loans+$81,2005 Pearson Education Canada Inc.,15-15,Deposit Creation,2005 Pea
18、rson Education Canada Inc.,15-16,Banking System As a Whole,Banking SystemAssets LiabilitiesSecurities$100Deposits+$1000Reserves+$100Loans+$1000,2005 Pearson Education Canada Inc.,15-17,Same Result when Banks Invest their ER in Securities,If the banks choose to invest their ER in securities,the resul
19、t is the same.If Bank A buys securities with$90 chequeBank AAssets LiabilitiesReserves+$10Deposits+$100Securities+$90Seller deposits$90 at Bank B and process is sameHence,whether a bank chooses to use its ER to make loans or to buy securities,the effect on deposit expansion is the same.,2005 Pearson
20、 Education Canada Inc.,15-18,Simple Deposit Multiplier,Simple Deposit Multiplier1D=RrDeriving the formulaR=RR=r D1D=Rr1D=Rr,2005 Pearson Education Canada Inc.,15-19,Multiple Deposit Contraction,The multiple deposit creation process should also work in reverse.When the Bank of Canada withdraws reserv
21、es from the banking system,there should be a multiple contraction of deposits.In fact,the contraction in deposits will be D=(1/r)RExample:If R=-100 and(1/r)=10 because r=.10,then D=-1000.,2005 Pearson Education Canada Inc.,15-20,Multiple Deposit Contraction:The Banking System,Banking SystemAssets Li
22、abilitiesSecurities+$100Deposits-$1000Reserves-$100Loans-$1000,2005 Pearson Education Canada Inc.,15-21,Critique of the Simple Model,Our simple model seems to indicate that the Bank of Canada has complete control over D.It ignores,however,the fact that deposit creation stops if:Proceeds from loan ar
23、e kept in cash(in this case nothing is deposited in Bank B,and the deposit creation process stops).In this case D=100,not 1000 we calculated earlier.2.Banks hold more reserves.If Bank A decides to hold on to all$90 of ER,no deposits would be made to Bank B,and this would also stop the deposit creati
24、on process.Again,in this case D=100,not 1000 we calculated earlier.,2005 Pearson Education Canada Inc.,15-22,Conclusion,The Bank of Canada is not the only player whose behavior influences D and M.D and M depend on:the publics decisions regarding how much C to hold the banks decisions regarding the amount of R they wish to hold,and borrowers decisions on how much to borrow from banks.,
